McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
hapter Topics
vidence of accounting diversity.
easons for accounting diversity.
roblems caused by accounting diversity.
ccounting clusters.
he influence of culture on financial reporting.
2-2
earning Objectives
. Provide evidence of the diversity that exists in accounting
internationally.
. Explain the problems caused by accounting diversity.
. Describe the major environmental factors that influence
national accounting systems and lead to accounting diversity.
2-3
earning Objectives
. Describe a judgmental classification of countries by financial
reporting system.
. Discuss the influence that culture is thought to have on
financial reporting.
. Describe a simplified model of the reasons for international
differences in financial reporting.
. Categorize accounting differences internationally and
2-4
orldwide Accounting Diversity
ifferences in accounting and financial reporting rules between
countries. For example:
ccounting for Goodwill
.S. -- goodwill is not amortized, but is written down only if
impaired.
apan and Korea – goodwill is amortized over its useful life not
Learning Objective 1
to exceed twenty years.
2-5
orldwide Accounting Diversity
sset revaluation
.S. -- upward revaluation of fixed assets is not generally
allowed.
uropean Union publicly traded companies are free to choose
between two different methods for valuing their assets.
Learning Objective 1
2-6
orldwide Accounting Diversity
nflation Accounting
.S. (and many other countries) -- financial statements are not
adjusted for inflation.
atin American countries -- experience significant inflation, so
financial statements are adjusted for changes caused by
inflation.
Learning Objective 1
2-7
Additional evidence of differences in accounting
between countries
Form 20-F
Required by the SEC for companies using non-U.S. GAAP
(unless they use IFRS).
Reconciles net income and stockholders’ equity from the
other GAAP to U.S. GAAP.
Learning Objective 1
2-8
onsolidated financial statements
.S. MNEs often have subsidiaries in a large number of
countries.
ccounting records in local GAAP and local currency are rolledup (i.e., consolidated) into U.S. GAAP.
equire conversion from local to U.S. GAAP.
equire translation from the local to U.S. currency.
Learning Objective 2
2-9
ifficulties with access to foreign capital Markets
ompanies often need to go outside their home country in
order to access financing.
aising foreign capital often requires reconciliation to comply
with different accounting rules or needs of investors and
creditors.
Learning Objective 2
2-10
Non-comparability of financial statements
Accounting rules often differ between countries.
International investors need to make their own
reconciliations or adjustments to financial statements.
International investors also must face differing levels of
disclosure, quality of accounting standards, and quality of
auditing.
Learning Objective 2
2-11
Lack of high-quality accounting information
Lack of disclosures—i.e., lack of transparency.
2-12
egal systems -- Common law
ewer statutes—more court interpretation.
eads to the creation of precedents or case law.
ound most often in Great Britain and other English-speaking
countries.
he source of accounting rules tends to be non-governmental
organizations.
Learning Objective 3
2-13
egal systems -- Code law
haracterized by relatively more statutes .
ound more often in non-English-speaking countries.
ccounting rules in these countries tend to be legislated (i.e.,
the source is the government).
ess specific, so other sources needed to provide guidance.
Learning Objective 3
2-14
axation
.S. -- taxable income and book income are generally quite
different.
ermany -- rules governing taxable and book income tend to be
the same, which generally results in more conservative
accounting.
eferred taxes are less of an issue in code law countries.
Learning Objective 3
2-15
Providers of financing
In many countries major sources of capital are families,
banks, and the government.
Accounting and disclosure in those countries tend to be less
important.
In the U.S. and U.K. the providers of financing are diverse
shareholders, so accounting and disclosure are more
important.
Learning Objective 3
2-16
Inflation
Some countries have historically high rates of inflation.
Accounting in these countries often requires adjustments to
offset the impact of inflation.
This is common in Latin American countries.
Given extended periods of low inflation in the U.S., inflation
accounting is not required.
Learning Objective 3
2-17
olitical and economic ties
hese linkages tend to make information sharing easier.
ations that share ties often have similar accounting systems,
such as France and former colonies in western Africa.
orrelation of factors
n summary, correlations exist among these factors.
ode law countries tend to link taxation to accounting
Learning
Objective 3
statements
and are less reliant on shareholder financing.
2-18
Accounting Clusters
Environmental factors related to accounting diversity have
been used to identify three broad based clusters:
Fair presentation / full disclosure model
Oriented towards the information needs of investors and
creditors.
Most descriptive of the U.K. and U.S.
Learning Objective 4
2-19
ccounting Clusters
egal compliance model
ccounting heavily influenced by tax rules and needs of
government.
ommonly found in continental Europe and other code law
countries such as Japan.
anks are primary source of financing.
Learning Objective 4
2-20
ccounting Clusters
nflation-adjusted model
imilar to the legal compliance approach.
s distinguished by the requirement for adjustments to mitigate
the effects of inflation.
s such, found mostly in South America.
Learning Objective 4
2-21
obes’ judgmental classification
hows how accounting systems in 14 developed countries
relate to each other.
lassified by influences of government, economics, taxes, legal
systems and business practices.
Learning Objective 4
2-22


Culture is also widely considered to influence financial
reporting systems.
Hofstede’s five cultural dimensions is the most commonly
used scheme to discuss cultural influences.
Learning Objective 5
2-23
ofstede’s Cultural Dimensions
ndividualism (vs. Collectivism)
ower Distance
ncertainty Avoidance
asculinity
ong-term Orientation
Learning Objective 5
2-24
ofstede’s Cultural Dimensions
ndividualism (vs. Collectivism)
reference for a loosely knit social fabric.
ollectivism represented by a tightly knit social fabric.
Learning Objective 5
2-25
ofstede’s Cultural Dimensions
ower Distance -- Level of acceptance of unequally distributed
power within and across the society’s institutions and
organizations.
ncertainty Avoidance – Degree to which members of a society
feel threatened by uncertain or unknown situations.
Learning Objective 5
2-26
ofstede’s Cultural Dimensions
asculinity – Emphasis on traditional masculine values of
performance and achievement vs. feminine values of
relationship, caring and nurturing.
ong-term Orientation – The extent to which the society values
persistence, thrift, observing order and respect for tradition.
Learning Objective 5
2-27
ray’s Accounting Values
rofessionalism vs. Statutory Control
niformity vs. Flexibility
onservatism vs. Optimism
ecrecy vs. Transparency
Learning Objective 5
2-28
ray’s Accounting Values
rofessionalism vs. Statutory Control
rofessionalism is reflected by individual professional
judgment and self-regulation of the profession.
tatutory control focuses on legal compliance and legislative
control of the profession.
he former is more indicative of the U.K. and U.S. and the
Learning Objective 5
latter more so with continental Europe.
2-29
ray’s Accounting Values
niformity vs. Flexibility
niformity indicates preference for standardized accounting
methods.
lexibility is reflected in the varying of accounting practices for
differences between companies.
.K. and U.S. approaches are examples of flexibility.
Learning Objective 5
2-30
ray’s Accounting Values
onservatism vs. Optimism
onservatism indicates preference for caution and prudence.
ptimism tends more toward fair presentation.
ermany has traditionally reflected a strong tendency toward
conservatism.
Learning Objective 5
2-31
ray’s Accounting Values
ecrecy vs. Transparency
ecrecy reflects a preference for minimal information
disclosure.
ransparency reflects openness and full disclosure.
ountries with predominantly family-owned and bank-financed
firms tend toward secrecy.
Learning Objective 5
2-32
obes’ model
escribes international differences as a function of culture and
the system of financing.
ulture influences the development of the system of financing
which influences the development of accounting.
ses two classifications -- A and B.
Learning Objective 6
2-33
lass A Accounting
escriptive of Anglo-Saxon countries.
trong outside shareholder equity-financing.
ptimism.
ransparency.
Learning Objective 6
2-34
lass B Accounting
escriptive of continental Europe.
ess widespread outside shareholder equity-financing.
onservatism.
ecrecy.
Learning Objective 6
2-35
dditional differences between countries
ifferent financial statement formats.
evel of detail in financial statements varies between
countries.
erminology, level of disclosure, and rules governing
recognition and measurement.
ifferent financial statements included in the annual report.
Learning Objective 7
2-36